RELATED COMPANIES

x

Loading data...

In a chat with Nikunj Dalmia of ET Now, Rashesh Shah, Chairman, Edelweiss Group, speaks about the prevailing market sentiment, macro-economic trends and his outlook for 2013. Excerpts:

ET Now: Do you think after a rewarding 2012, we are in for a rewarding 2013 as well?

Rashesh Shah: 2013 is starting off fairly well and as we look forward, the first half still looks fairly positive. For the second half, we will have to see whether structural improvements are happening globally and in India, but for the next about 5-6 months, things look fairly positive because of liquidity, the kind of reform process going on in India, the sentiment has improved a lot and even globally, things look fairly good now.

ET Now: So after a 25% run up in last 12 months and a 10% appreciation in last 3 months, how does one judge that all the good news is not in the price?

Rashesh Shah: It is hard to look at the magnitude and whether the market go up anymore and all but overall, this year looks good. If not the broader market, the individual stocks look very good.

Market is in an upward trend and in an upward trend, investors should not try to forecast how big the trend will be. We are in a zone where there is a lot of improvement for almost 18 months. All through 2011 and the first half of calendar year 2012, there was a lot of gloom doom, things were slowing down. Now investors are looking forward. They are looking for interest rate cut. We have seen yields coming down very sharply. They are seeing action from the government and investors do believe that the government will be able to contain the fiscal deficit at 5.3%. So given all of this, the next 5 to 6 months look fairly good from an investment perspective. To follow through on that, we should wait for the investment cycle to start in India, to see whether exports pick up and to see improvement in those structural things and we are hoping that we will see some improvement as we go forward.

ET Now: So do you think 2013 could be a year of inverted V, strong start and then a crash landing?

Rashesh Shah: I do not think there will be a crash landing unless there is a big event. I think what will happen is the first half will be good and then the market may end up stagnating because mostly people will want to look for structural improvement. Inflation has to come down, investment cycle has to start, exports have to pick up, the current account gap is a key issue, it has to come down, rupee will then stabilise. So all these things is what investors will also want to look at because every time there is a change in sentiment and liquidity, the markets gallop away and then the markets wait for earnings or the structural improvements to catch up. So after the first 5-6 months, market will wait for that. So I would not say crash but it will then be great for the structural and fundamental improvements to happen for another improvement in sentiment.

ET Now: So when do you think markets will convincingly snap out of this four-year trading range? This four-year trading range indeed has troubled all of us.

Rashesh Shah: It is hard to say because as of now, we are not very far away from the top. So on the whole, it looks very positive but the key thing to really watch out is the global flows are still very solid, the global liquidity conditions are very good. India has always been a very big beneficiary of liquidity conditions globally. So as long as global liquidity conditions are fairly fluid, it will be good for India.

ET Now: So if China picks up, if US economy recovers, do you think that could challenge global liquidity because what really helped global liquidity to migrate to India was the fact that other economies were slowing down?

Rashesh Shah: Absolutely, the key risk for India will be if the economies overseas start improving when interest rates start going up. As of now, we do not see any sign of that. If we look at the yields in the US and all, Fed has also said until 2014-2015 they will keep the rates low. So for about a year, we do not have that risk but the key risk is if global economies improve, then interest rates could go up and commodity prices could go up but as of now, we are not seeing any signs of that. If at all the signs will happen, it will happen maybe in the third or fourth quarter of the year. So for the next couple of quarters, I would not be very worried about that.

ET Now: If I look at the Bloomberg consensus for FY14, the consensus Sensex growth is in the range of about 10% to 12%, which is not a very strong number. Are you of the view that if global liquidity continues to get channelised into India, we could see a strong PE expansion because in 2012 more than earning expansion, we have seen a PE expansion?

Rashesh Shah: Absolutely, in the early days it is always going to be that because people are expecting an earnings improvement. So the earnings upgrade have not yet started and 10-12% is more conservative when trying to look back. But on the whole, we would expect that if liquidity conditions remain like this and all the things that are going on in India, quite a few approvals have happened, quite a few clearances have been coming, we might see an upgrade of that. So 10-12% might end up becoming 14-15% as we go forward. So on the whole, I am slightly more optimistic on that.

ET Now: In general, do you think risk-on trade will dominate global markets for the year 2013 because there is abundant liquidity? A year ago, that liquidity was hiding into safe havens like US bond and German bund but now one is getting a sense that the liquidity seems to be migrating away to risky assets?

Rashesh Shah: Yes, since August end onwards, we have seen a risk-on environment and as long as there are no fears of a big global event or a crash like the Eurozone issues and all, as well as if there are good liquidity conditions in the world, you should expect the risk-on will be there. There might be sporadic risk-off comebacks but they will be more like corrections to the risk-on trend that we are seeing all over the world.

ET Now: I distinctly remember that we had this conversation on this forum about six months ago. The world was bearish, sentiment had taken a hit but you were bullish. Now world is feeling slightly charged up, expectation bar has gone up but are you confident that Indian markets will outperform or do you want to tone down your expectations?

Rashesh Shah: It is always very hard but see, the idea is not to be just a contrarian. I do not think anybody who is in the investing business, who is in the advising business for investors, can always just be a contra i.e. if everybody is feeling good, you should feel bad or everybody is feeling bad about the market, you should feel good.

Six months ago, our view at Edelweiss was that most of the bad news was getting priced in. We were seeing the early signs of liquidity because even the Reserve Bank of India had eased off liquidity after March. The April interest rate cut did help and we did start seeing some improvement in the fundamentals also at that point of time. So it was more driven by that. Currently, we are still seeing an interest rate cut from RBI in the year, we are seeing some moderation of inflation going forward, we are seeing good global liquidity conditions. So given all these assumptions, you will feel optimistic about the market and the market trend going forward. So just because everybody else is also feeling bullish does not mean you should feel contrarian in that sense. The trends are still upwards, though there will be corrections once in a while because markets do need that. Overall, the primary trend is fairly optimistic.

ET Now: Is it too early to bet on cyclicals? Should portfolio construction and alignment shift towards sectors, companies, or group of stocks which will benefit if Indian economy recovers?

Rashesh Shah: Absolutely, especially stocks which are very under owned and beaten down because one of the things that we ignore in investment is the under ownership, over ownership trend because when everybody owns a particular sector as it was safe or a good place to hide, usually it is hard for that sector to outperform the market. So we are seeing investors now looking at under owned sectors, sectors which have been badly beaten down where there will be some comeback and we are already seeing that in some infra and real estate stocks. So that theme is very well underway.

ET Now: But do you think PSU banks currently are in some kind of a sweet spot? Bond yields have come below 8%, valuations are looking attractive, there is under ownership there and if Indian economy indeed a recovers in the second half of this year, lot of bad loans could become good loans.

Rashesh Shah: Yes, absolutely. For the last three-four months we have seen that the entire PSU banking sector was very under owned. Reople had really expected the worst of the asset quality issues with them but in the last three-four months that swing back has happened and I would agree with you they look fairly undervalued, fairly well priced as of now for an investment upside and again the asset quality issues are not going away but they are fairly priced in and everybody knows how bad things are in that sense.

ET Now: So what to your mind will create wealth this year? Will it be a combination of fixed-income and equities along with gold or now it is time to go all in when it comes to equities?

Rashesh Shah: I would expect that 2013 should be a year of equities. If you remember, a year ago we had spoken and I thought a good mixture of fixed-income and equities is a good idea because interest rates were scheduled to come down. Now, what is happening in the fixed-income market, when you look at government bonds, corporate bonds and all, at least a large part of the interest rate cut or the expectation of falling interest rates has already got priced in. So now that it has got priced in, when the reality happens, you might not see as much of a capital appreciation as you expect. So the real benefit of falling interest rate coming onto the equity markets will be the play for the year.

So I would think the equities would be the asset class for this year not just in India but globally, because even globally equities are still very under owned. If you look at all the pension funds and insurance companies, they have reduced their allocation to equities significantly and everybody has gone into bonds. So the last two years globally and as well is in India, the allocations of insurance companies and mutual funds have been a lot more towards fixed-income rather than equities and we are seeing the swing back of that allocation to equities again.

ET Now: But do you think managing expectations will be a key challenge for 2013 because I distinctly remember when we started the year 2012 there was a feeling of mortuary. Now it is difficult to find a bear on the street, just about everybody is convinced that good days are back.

Rashesh Shah: It is always there and in India one of the issues we have is expectations are like a switch, they go on and off very quickly. So they can change very quickly but the idea is to calibrate those expectations, not be overly optimistic and euphoric and all, be very careful and not just go and bet your house on everything.

But overall you should see the optimism that is coming back, the economic improvement is also underway and all of that is a good thing. So I would say it is a good time but not to be completely euphoric and overly optimistic and not think through investments. Always you need to think through what you are investing, why you are investing in those stocks but given that, it is a good time for investments.

ET Now: What is your cut call when it comes to the monetary policy, do you think this time around Reserve Bank of India could surprise all of us with a strong rate cut and they could frontload the rate cut in this month's credit policy?

Rashesh Shah: What we are expecting is a smaller rate cut in Jan and a larger rate cut in March, maybe a 25 bps in Jan and 50 bps in March. But if you look at this quarter, which is from Jan to March, expecting a 75 bps cut is very good and it will be very fairly aggressive and very good for the economy.

ET Now: For the calendar year, you expect rates could come down by about 75 bps?

Rashesh Shah: No, I think for the first quarter and then we have to see where inflation goes but assuming inflation does not fall below 6.5-7%, then we might see another one or two cuts from RBI. So maybe a 100 bps through the calendar year but we expect that almost 75 of the 100 should come in the first quarter.

ET Now: From a bond market and equity market perspective, do you think monetary policy is more like a 'buy on rumour and sell on news' kind of an event?

Rashesh Shah: Partly so because people are starting to factor in the cuts that are expected in this particular quarter. As you know, the markets are fairly efficient and especially in the government securities market, we have players like banks and foreign banks and all of them. They are fairly savvy in terms of their future expectations and all. So partly it is there but partly you can still afford to wait because the monetary policy for Jan is fairly important and that trend has started. So the fixed-income market also looks good but compared to that equity markets looks stronger as of now.